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Carts before horses: Reflections on recent Green Climate Fund meeting in Korea

Posted Jul. 15, 2013 / Posted by: Karen Orenstein

For 2 weeks, I’ve been contemplating whether there is something new and exciting to say about the June board meeting of the Green Climate Fund in Korea. In short, the answer is -- not really. The GCF board continues to gloss over the foundational questions at hand: “What is the purpose of the Fund, and who it is supposed to serve?” -- even though these questions underlie most GCF debate and dialogue.

Is the GCF supposed to focus on meeting the adaptation and mitigation needs of ordinary people in developing countries, especially those who are most vulnerable and/or marginalized (which is the position of Friends of the Earth)? Or is the GCF meant to move as much money as possible into, out of and within developing countries, with the idea that maximizing money leads to maximizing mitigation and adaptation? As I’ve written previously, there is some overlap between these two purposes, but there is also a lot of distance. And, with some countries’ heavy emphasis on mobilizing private finance, it is hard not to be suspicious that this “more money moved means more impact” rationale is really an excuse for the lack of political will to come up with public money for the Fund. (And is the proof not in the pudding? Developed countries have offered scant public climate finance. Most refuse to pledge specific quanta at UNFCCC meetings, let alone produce a concrete road map of how they’ll scale up to the promised $100 billion annually by 2020.)

While trying not to repeat myself, I offer the following short reflections on the most recent board meeting.

Flawed sequencing

Before deciding on the “financial instruments and modalities” of the GCF, policymakers first need to agree on the GCF’s purpose and objectives. The board also has yet to discuss the fundamental question of whether the GCF is a fund (that receives and passes on money and thus would have to be mostly grant-based) or a bank (which may lend money directly via loans and indirectly through capital markets and could additionally generate revenue and deal with fund re-flows).  

Despite these unanswered questions, the board spent a lot of time debating the private sector facility of the GCF.  The UK, United States, Australia, Norway and Switzerland are trying to move the GCF full throttle into a highly financialized banking institution that would attract international capital. In contrast, Egypt, France, India, the Democratic Republic of Congo and others sensibly cautioned that the GCF should start simple -- with grants and concessional loans. Because the basics of the Fund have not been thoroughly discussed, the relatively detailed PSF discussions are taking place in something of a vacuum that is disjointed and disconnected -- kind of like having one fully furnished room in a house that has yet to be built. (Regrettably, there has been very little discussion even on the presumably primary structures of the GCF -- a mitigation window and an adaptation window.) So we left Korea with commitments to establish a bunch of taskforces -- a Private Sector Advisory Group, a Risk Management Committee (which is especially important) and an Investment Committee -- but we have no real idea of how the PSF is supposed to relate to the rest of the Fund.

The elephant in the board room remains the utter lack of funds for the GCF and international climate finance more broadly. But the co-chairs would not include the establishment of a resource mobilization unit, as suggested by India and DRC. Perhaps this shouldn’t be too surprising given that, at the last GCF meeting in March, the US objected to the setting of any specific timeline to mobilize resources for the GCF. So, oddly enough, we left Korea with a decision that had no mention of a resource mobilization unit but went into considerable detail on how the PSF will be organized (e.g. setting out the composition the Private Sector Advisory Group).

Private sector facility – Better than it could have been

Going into the meeting, there was a real danger that the PSF would be set up essentially as a parallel fund, with its own governance structure that would even allow for private sector board members with voting rights. There was even suggestion that its establishment be outsourced to the International Finance Corporation, an arm of the World Bank. Fortunately, this was not borne out, and the PSF will operate “under the guidance and authority of the Board as an integral component of the Fund.”  Thus, it could have been worse, and one might be able to claim here that the cup is half-full. The PSF could still go in a very bad direction, but we have opportunities at the next board meeting to make sure it doesn’t.

However, some governments stymied efforts to ensure that the “[private sector] facility will promote the participation of private sector actors in developing countries, in particular local actors, including small- and medium-sized enterprises and local financial intermediaries” (as required by the GCF Governing Instrument).  Indeed, despite valiant efforts by countries like Zambia, which advocated for a paper on modalities to promote involvement of small and medium enterprises in small island developing states and least developed countries, binding language (i.e. that the board “decided” something) on SMEs did not prevail. Similarly, attempts by India and others to ensure that adequate resources are explicitly allocated to SMEs -- as compared to international corporations -- were also foiled.

Intermediaries

In order to get the GCF up and running as soon as possible, there has been a strong push for it to work as much as possible through “national, regional and international intermediaries” (and in some of the decision text coming out of Korea, “subnational intermediaries” are also included in this grouping). The term “intermediaries” was bandied about a lot at the board meeting, with some board members publicly admitting they don’t really know what different people mean when they use the term.

However, it is clear that in many cases, “intermediaries” refers to financial intermediaries. (FIs may include national and multilateral development banks, commercial and investment banks, private equity and venture capital funds, microcredit institutions, insurance and other financial institutions.) While FIs may end up being a significant part of the GCF, they pose many risks and limitations. The GCF must very carefully examine the track record of how development finance institutions have used FIs, so that it does not repeat their mistakes. We have seen FIs fail to meet developing country priorities as well as poorly implement social, environmental, fiduciary, transparency and accountability standards. We must not end up with a fund that both has a poor record on environmental, social and development impacts, and is also biased towards multinational corporations and the largest emerging markets.

Indeed, the Compliance Advisor-Ombudsman, the independent recourse mechanism of the IFC, recently conducted a damning audit of the IFC’s FI lending. The CAO found that “the proportion of cases of non-improved performance was around 60 per cent at the subclient [i.e. sub-project] level, which is where IFC seeks to really have an impact.” In other words, when IFC outsources investment decisions to FIs, most projects they choose aren’t any better from an environmental, social or development perspective than if the IFC weren’t involved at all. Financial intermediaries often do not have the mandate, capacity, knowledge or willingness to assess and monitor the development, social and environmental impacts of sub-projects, or to take corrective measures. There are also huge transparency issues.

Transparency -- be on the look-out

One thing that was unambiguously transparent at the GCF meeting was that this supposedly “paradigm shifting” institution is regrettably untransparent -- and the blame for that lies squarely with a few rich countries, most especially Australia. What happened on this front was so bad that it warrants its own blog…which is coming soon…

Photo credit: Cathy Demesa

Comments on “Business Model Framework, Private Sector Facility” (GCF/B.04/07) By Friends of the Earth U.S. and Institute for Policy Studies (Factsheet)

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